State commissioners speak out in opposition to FERC’s transmission incentives

State utility regulators on Nov. 13 voiced their opposition to the way FERC administers the transmission incentives mandated in Order 679. 

At the 123rd National Association of Regulatory Utility Commissioners (NARUC) Annual Meeting in St. Louis, Mo., FERC Commissioner John Norris said the discussion about transmission incentives “is an attempt by the Commission to take a step back and say, ‘Is it working? Does it need to be adjusted? Is it not working?’”   

The responses from state regulators varied slightly but sent one of either two messages: incentives are not necessary as currently administered, or incentives are not necessary at all. 

Public Utility Commission of Texas commissioner Ken Anderson said his state has been accused of being “a little cheap” when it comes to return on equity (ROE) but added, “We build lots of transmission very quickly.”  He related the attitude of one developer, who said they would rather have “10% of something rather than 14% of nothing.”  

Anderson said providing companies with certainty, then holding them to meeting their timelines and budgets would be a better way to ensure the building of more transmission than “just pouring money” into projects. He said developers already “get a great deal: 10% rate of return with virtually no risk.”

Garry Brown, chairman of the New York State Public Service Commission, said there are many competing uses for ratepayer money, and providing financial incentives for transmission may not be the best use of limited funds. 

“We collect ratepayer money for energy efficiency, we collect money for renewable resources, there’s a push to collect ratepayer money to implement the smart grid, there’s ratepayer money to implement all the environmental regulations and yet [incentives make transmission] first among equals” even though it may not be the greatest need, Brown said.

“The harder part of transmission is not the rate of return. It’s getting it sited, it’s the local problems; all of that stands in the way more than the rate of return,” Brown said. 

Rate incentives exacerbate the problem of getting utilities to serve their customers at the lowest possible cost by adding unnecessary expenses the ratepayers must fund, said Sherman Elliott, commissioner with the Illinois Commerce Commission.

Phillip Jones of the Washington Utilities and Transportation Commission said the perception is that the incentive adder is almost a foregone conclusion, and that should not be the case. Jones recommended refining the “nexus test of [FERC] Order 679, which considers scope, effect of the project on improving reliability or reducing congestion, and challenges or risks” when trying to rationally tailor the incentive to the need.

Developers’ risk was frequently mentioned as a barrier to construction. James Volz, chairman of the Vermont Public Service Board, said “If you reduce the risk of cost recovery, then I don’t think you need to pay them an incentive.”

While some advocated the elimination of incentives, others recommended modifying their use. Paul Centolella, commissioner of the Public Utilities Commission of Ohio, said tailoring incentives to the project is the prudent approach. He recommended examining whether a project faces a particular kind of risk that needs to be addressed with risk reduction or incentives before granting incentives. 

Many agreed that incentives need to be the exception and not the rule if they are truly meant to incent behavior. Kevin Gunn, chairman of the Missouri PSC, said, “You push the market to do something when it won’t do it on its own and when it needs to get done.” 

FERC’s Norris wrapped up the hour-long discussion by inviting further comment through other channels, allowing that “Circumstances change; policies may need to change as well.”